Effectiveness of loyalty programs in online markets

Abstract

A loyalty program is a widely operated marketing promotion strategy to retain customers and maintain sales. However, it is not clear whether setting up a loyalty program is profitable activity. We compare the different effects of a loyalty program in online and off line markets. Loyalty program increases the customer retention rate by assuring customers that they can purchase goods at a low price in the next purchase. In that, the viability of a loyalty program is determined by the ability of consumers to search compared to total market size. We conclude that a loyalty program could not show a significant level of success in the off-line market because the number of firms which a consumer is actually able to visit is very small and she has almost all price information in the market. However, in the online market, choice options of a customer are dramatically expanded while a consumer``s ability to search could not keep pace. As a result, the loyalty program has come back into the spotlight. In addition, with our results, we can explain the low level of usage of the shopbot in the current online market. The shopbot may make customer even worse off, in the presence of a loyalty program by inducing customers to make myopic decision. As consumers learn this fact by experience, they avoid shopbots.